Business Succession Planning

From the beginning, you have had a plan for your business to succeed. You set goals and developed solutions to achieve those goals.  For small family businesses that have survived the pandemic and are succession planning may not seem like a top priority. However, if you are close to retirement, there is a need to not only talk about business succession, but to have a written plan in place.

Business succession planning is a strategy for passing on control of your company. For many small businesses, this means transferring management and ownership to the next generation of family or employees. Often it is a business owners plan to create a legacy business. Or perhaps keeping things in the family rather than selling is a more realistic goal. Do you have a practical plan to successfully achieve your goal?

The Wall Street Journal notes that older generations will pass to their heirs around $70 trillion between 2018 and 2042, much of that in equity in small to medium sized businesses.  As Baby Boomers reach retirement age and consider retiring from their businesses, they are facing the realities associated with business succession.  Your business was not built overnight, and ensuring it survives after you step down also will not happen overnight. Here are some considerations to help guide a smooth transition.

You should prepare for succession at least five to ten years before your retirement. That should give you enough time to identify who in your family or employees will take over particular roles, train them for the job, and make sure that they can handle the responsibility of perpetuating your business.

Part of succession planning is having a realistic outlook about which individuals are best suited for certain roles. Good managers do not always make good owners, and vice versa. Some family members who may have an ownership interest may not be well-suited to manage the business. Also, some may be great at running the business day-to-day but lack the knowledge and foresight needed for long-term growth strategizing.

A person’s place in the family business should be earned—not given. A family member may feel it is their birthright to take over a particular role, but if another person is better suited, you might have to choose what is best for the business even if it results in hurt feelings.

Enter your succession planning with the understanding that you are not going to please everyone. One of the toughest parts of a business is separating the personal and the professional, which is easier said than done. Consider bringing in outside advisers such as lawyers, tax experts, and wealth advisers to facilitate the discussions and provide a business-first perspective.

Succession planning includes planning for retirement, as well as death, injury, and illness. Let’s say that, upon your retirement, you plan to temporarily retain company ownership as the next generation of management steps into place, but you unexpectedly die or become incapacitated. What happens then? A succession plan that addresses multiple contingencies is stronger than one that does not.

Once management successors have been chosen and begin taking on more responsibilities and you have identified when the handoff will take place make sure that your business succession plan coordinates with your estate plan in the most tax-efficient manner. Formalize your succession plan the same way you did your estate plan by formalizing it through documents such as shareholder agreements, company agreements, employment contracts, and buy-sell agreements (which can be used to buy out the ownership stakes of other members). These documents should align with your estate plan to avoid any potential legal conflicts.

As you plan for succession, keep in mind that you can remain an owner in the company and help to ease the transition from one generation to the next while receiving business income. You could also serve as a paid company advisor or continue to invest in the company post-retirement.

Our attorneys can help you by advising you on succession planning and coordinating it with your estate plan.  Call or contact us to set up an appointment.